Question
Violet Sky Shipping is evaluating a 1-year project that would involve an initial investment in equipment of 30,400 dollars and an expected cash flow of
Violet Sky Shipping is evaluating a 1-year project that would involve an initial investment in equipment of 30,400 dollars and an expected cash flow of 31,700 dollars in 1 year. The project has a cost of capital of 2.61 percent and an internal rate of return of 4.28 percent. If Violet Sky Shipping were to use 30,400 dollars in cash from its bank account to purchase the equipment, the net present value of the project would be 494 dollars. However, Violet Sky Shipping has no cash in its bank account, so using money from its account is not possible. Therefore, the firm would need to borrow money to raise the 30,400 dollars. If Violet Sky Shipping were to borrow money to raise the 30,400 dollars, the interest rate on the loan would be 0.13 percent. Violet Sky Shipping would receive 30,400 dollars from the bank at the start of the project and would pay 30,440 dollars to the bank in 1 year. What is the NPV of the project if Violet Sky Shipping borrows 30,400 to pay for the project?
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